Articles in Outsourcing

Free registration required.

• Biggest Outsourcing Legal Issues for 2006 - Business executives engage in outsourcing as a strategy to pursue multiple goals for a distributed globalizing enterprise.  In this environment, modern supply chain management dictates the biggest business requirements: cost management, pricing predictability, scalability and reliability.  Thus, outsourcing lawyers need to meet the business imperatives to implement a multi-sourcing and multi-silo approach, with appropriate retained resources in-house to manage complex sourcing programs.  In best-of-breed outsourcing contracts, these business goals will be reflected in carefully structured and negotiated deal terms involving pricing, quality, risk management, process design, termination and privacy rights. What are the biggest outsourcing legal issues for 2006?

• Failed Deals: CSC Sues Sears over Termination. Sears and Computer Sciences Corporation entered into a $1.6 billion IT infrastructure outsourcing in June 2004.  By April 2005, Sears had given notice of termination for cause.  Claiming the termination was in bad faith as a means of escaping a termination fee, CSC sued Sears alleging irreparable injury to reputation and seeking to enjoin the termination.  The dispute took the case out of an arbitration clause and into the courtroom in proceedings seeking an injunction.  What happened?  What lessons can we learn?  

• Consumer Protection in Outsourcing: Liability of Data Processor for Consumer's Loss of Credit due to Erroneous Debt Collection Procedures.In the course of processing data relating to an account receivable, the accounts receivable department of a service provider, or an outsourced debt collector, could make a mistake that costs a consumer his good credit rating and deprives him of access to consumer financing.  What liability does a creditor have when it assigns the unpaid debt to a debt collection agency that erroneously pursues credit-harming activities?  In a May 2005 court decision, a consumer alleged theories of defamation, negligence, gross negligence and punitive damages for an alleged violation of New York State common law. 

• Failed Deals, Bankruptcy and Class Action Securities Fraud in Global Outsourcing: In re Alcatel Securities Litigation. In a pre-Sarbanes-Oxley time, the hyper-growth Dot.Com era disintegrated into "Dot.bomb" implosions.  Reciprocal deal-making in speculative ventures was almost the norm, particularly in telecommunications.  The litigation aftermath of failed deals, bankruptcy and class actions for securities fraud is reaching resolution.  This short case study provides a synopsis of some key points of failure in reciprocal transactions, with a focus on telecom.

• "Offshoring" of BPO Services within the European Union: A Transatlantic View of the Proposed Services Directive. The European Common Market (and its successor the European Union, "EU") were founded on the principles of four freedoms of movement: capital, people, goods and service.  According to the European Commission, the service sector now accounts for more than 70% of economic activity in the EU, much of which involves Europe’s small and medium sized companies.  A Services Directive, proposed in January 2004, would liberalize the freedom of establishment of EU enterprises and trade in services among EU Member States.  The ensuing political debate evokes classic issues in trade policy in international services.  Will this Directive have any impact on how outsourcing is conducted in Europe?  The article considers the impact on service recipients and service providers in various BPO disciplines including call centers, IT, logistics, HR, finance, accounting and engineering.

• Class Action Litigation in Outsourcing: Managing Consumer Litigation Risk after the Class Action Fairness Act of 2005.  The enactment of U.S. federal legislation forcing litigants to argue large class-action claims in federal court will help business generally.  If class actions are basically about violations of consumer rights, what impact will it have on outsourcing, and why?  This article applies to all those who manage call centers, credit cards, employment and payroll, HR administration, finance and accounting and other consumer-facing business functions.

• Outsourcing after Divestiture of Manufacturing Operations: IBM's Services Agreement with Lenovo for Personal Computers.   On December 7, 2004, IBM announced a definitive agreement to transfer its personal computer division ("PCD") to Lenovo Group Limited (formerly known as Legend), a Chinese state-owned enterprise.  The deal heralds a new era in post-sale support. Sensitive issues of foreign ownership (especially from China), marketing, finance, human resources management, brand management and customer support, management control need to be addressed on cases of divestiture.  The new model breaks ground in the degree of the "seller's" ongoing involvement in the operations of the divested operation.  Chief executives, business development officers, marketing officers and M&A advisors can benefit from the lessons of the transaction.
  

• Forensic Investigations: Distinguishing Ordinary Outsourced Investigation from Privileged Investigation. Many providers of finance and accounting ("F&A") services cover a broad array of managed services.  The functions of internal audit, pre-litigation claims and, more specifically, insurance claims processing deserve special attention from a legal standpoint.  This article addresses distinctions between ordinary managed services (subject to pre-trial discovery) and "privileged" investigations that are not disclosable to adversaries in litigation.  The analysis applies across all forms of business process outsourcing ("BPO"), but is particularly appropriate for F&A, specialty HR outsourcing and Sarbanes-Oxley "Internal" Audit.
  

• Death of the Captive Paradigm? Business Transformation of a Shared Services Captive: Legal and Business Issues in Conversion from SSO to Independent BPO Service Provider. General Electric Company's announcement on November 8, 2004, that it has agreed to sell 60% of its Indian captive services company GE Capital Information Services ("GECIS") marks a turning point in the trend towards establishment of offshore captive services companies.  This article considers the legal and business issues in a conversion of a foreign captive shared services organization ("SSO") to an independent business process outsourcing ("BPO") service provider.  It is a lesson in management strategy, risk analysis, partner selection and, most importantly, return on investment for shareholders. 
  

• Vetoing the Legislation of Outsourcing in California.Quite evident in the recent presidential campaign, as well as in numerous legislative campaigns across the country, was the issue of outsourcing.  Should curbs be placed on this business practice in both the public and private arenas? Perhaps in no state was the interplay of the current political and business agendas over outsourcing more evident than in California.  In the last days of the states 2003-04 legislative session, Governor Schwarzenegger faced a number of proposed bills that were aimed at controlling the off-shoring of California jobs and services. 
  

• Jumpstarting American Jobs: Mixed Impact on Outsourcing and Offshoring. Tax laws are a powerful tool for public policy. Tax laws can promote or impede virtually any type of investment or commercial opportunity.  Tax deductions and credits can provide powerful incentives for research and development, particular sectors, products and services.  Denial of tax benefits can dissuade investors and enterprise customers from pursuing particular business activity. A complex and multifarious pending U.S. federal tax law will promote outsourcing but will restrict offshore outsourcing and foreign captives services subsidiaries.  Intended to promote domestic employment and foreign investment in the United States, this law will have several impacts, some positive, some burdensome, upon offshore outsourcing and foreign captive services subsidiaries.
  

• International Trade Regulation in Outsourcing:Update on Doha Round and U.S. Free Trade Agreements and Impact on Offshore and Nearshore BPO. In 1994, the World Trade Organization adopted at General Agreement on Trade in Services.  That agreement ("GATS") was of limited value, reserving many industries for local protection.   On July 31, 2004, the Doha Round moved forward towards further agreement establishing multilateral freedoms for transborder trade in services.  And the U.S. announced that both the U.S. House and Senate had approved the U.S.-Australia Free Trade Agreement, which now awaits ratification in Australia.  This political and business impact on outsourcing may be significant, depending on the affected sectors.
  

• Failed Deals: Termination in Lieu of Litigation in Outsourcing-Replacing a Service Provider. Failed outsourcing deals can be publicly embarrassing for both the service provider and the enterprise customer.  The embarrassment exists even when one party is in material breach and the other party has the contractual right to termination for default.  For a "failed deal," when is an outsourcing contract terminated "by mutual consent"?  What conditions apply to a termination for cause that is settled without litigation?   The answer may lie in the conditions of termination, as well as when the conditions are negotiated.
  

• Tax Preparation Services, Tax Payer Confidential Information and Identity Theft: Potential Liability for Outsourcing Service Provider's Wrongful Disclosures.  In March and April each year, U.S. corporate and individual tax returns must be filed and taxes paid.   Due to increased complexities in the tax law and related tax return forms, hiring a tax preparer is no longer a choice, but a necessity, for a large number of Americans.   Given this persistent, seasonally peaking and annual recurring demand, licensed tax preparers have long looked to outsourcers for meeting short-term needs annually.  Offshore business process outsourcing can save significant money for Certified Public Accountants and other licensed tax preparers in the United States.  Foreign subcontractors in India, the Philippines and the Caribbean are preparing income tax returns for American taxpayers.  News reports indicate that few U.S. taxpayers have no knowledge of this practice.   
  

• Free Trade Agreement for Outsourcing to and from Australia. 
  On March 3, 2004, U.S. Trade Representative Richard Zoellick announced the conclusion of a broad free-trade agreement with Australia.   The pact contains clarifies the rights of enterprises in each country to engage in electronic trade in information technology-enabled services.  While the pact clearly covers data processing services as "digital products," there may be some debate over whether it also covers IT-enabled call centers, claims administration, credit application scoring and pre-underwriting for lending and insurance activities, business process outsourcing ("BPO") and even HR administrative outsourcing ("HRO").  We believe this agreement represents a major advance in the concept of trade in outsourcing services.  By a wave of the definitional wand, outsourcing becomes entitled to the core protections of international trade: national treatment, most-favored nation status, non-discrimination and transparency of applicable legislation relating to trade in services that delivered as "digital products." 
  

• Legal Compliance in Outsourcing. When is the Service Provider Liable for its Customer's Compliance with Laws, including Payment of Fines and Penalties for Non-Compliance?   Most outsourcing agreements require each party to comply with applicable laws.  However, as business process outsourcing ("BPO") services move up the value chain, legal compliance obligations can get somewhat tricky.  Consider the scenario where the service provider's services substitute for the enterprise customer's normal compliance with laws governing the enterprise customer's operations.   If you are a candidate for public office, your consultant might just be liable for your compliance, fines and penalties. 
  

• Litigation in Outsourcing: Liability of Corporate Affiliates, Secured Lenders and Venture Capitalists and their Attorneys under WARN Act for Termination of Employees.  The Worker Adjustment and Retraining Notification Act, 29 USC § 2101, requires employers to give at least 60 day's notice to their employees before the effective date of a mass layoff or a plant closing.   The Act, adopted in the wake of numerous plant closings in the 1970's and 1980's, attempts to soften the blow of job loss to workers and their families by providing them with advance notice to allow for transition time to different employment.   The WARN Act imposes a financial obligation on the employer that continues after the employer has given notice of termination of employment.  See more in this article.
  

• Outsourcing as a Tool in Exiting a Failing Business: National Australia Bank's Acquisition of Shares in Rival AMP Ltd.  Outsourcing can provide a unique benefit in preserving the value of a declining line of business.  Consider an industry where many major players are suffering operating losses, where "ill-timed" acquisitions have resulted in write-offs and loss of shareholder value, and where there are no buyers or where the assets impaired by recent losses cannot be sold for what has been the historical valuation.  In such cases, outsourcing offers to management the "breathing room" to maintain a customer base while waiting for either a recapture of the same outsourced business in a future up-market.  
  

• Outsourcing Tools for Insourcing.  The typical outsourcer also provides a spectrum of support and consulting services compatible with a totally insourced environment.  Thus, outsourcing is only one of the core service offerings.  Enterprise customers now ask the question: why outsource when I can insource using the right tools?   While there may be many reasons to outsource, there are equally many reasons not to outsource.  The reasons relate to ERP, SCM, CRM and DRM solutions that can be used to keep customers loyal and flexibly prepared for a future outsourcing.  This case study explores the tools needed when insourcing.
  

• Document Mismanagement: When the Customer Miscommunicates a Court Order to Outsourcer.  For corporations that have outsourced any process of document storage or management, electronic discovery procedures in litigation can be a nightmare.  The lessons of multiple mistakes by both the enterprise customer and the service provider leads us to suggest some "best practices" in relation to litigation management and document management for inclusion in the policies and procedure manuals that accompany sophisticated outsourcing transactions. See more in this article.  
  

• Business Intelligence and Industrial Espionage: Boeing Loses $1 Billion in Transactions as Punishment, Escapes Debarment
  "Business intelligence" refers to the practice of collecting and analyzing competitive information in the marketplace to assist an enterprise in self analysis and redirection of its resources to maintain and improve competitiveness.  "Industrial espionage" refers to the clandestine methods of obtaining competitive information that is not publicly available.  As a legal matter, this distinction can have serious consequences. This case study offers some suggestions for staying on the right side of the law not only in business intelligence but also for internal audit controls and business ethics.  
  

• To Bundle or Not to Bundle Goods and Services: NASA's Desktop Contract
  Some bundling of goods and services is intrinsic to all outsourcing.  The advantages of bundling to the service provider have been touted by Lou Gerstner, who, while Chairman of IBM, observed that services are the "wrapper" in delivering goods and related services as a package  This case study comments upon the practice of bundling.
  

• International Outsourcing:  Choice of Forum in Dispute Resolution in Outsourcing
  Outsourcing contracts should contemplate all relevant issues relating to dispute procedures.  In a decision rendered in June 2003 a federal district court in New York ruled that a contract that fails to include a choice of forum clause required a special judicial review and considerations, as resulting in judicial resolution of the uncertainty about where the dispute was to be adjudicated.  An incomplete dispute resolution can result in substantial costs and delays as well as consequential damages.  The parties in the litigation included BP Amoco PLC, Aon Risk Services, National Union Fire Insurance Co. of Pittsburgh, Pennsylvania and  Associated Electric & Gas Insurance Services, Ltd, ("AEGIS").
  

• Human Resources Outsourcing:  Employment Manuals as Basis for Exceptions to the Employer's Liability for Wrongful Termination of Employment and Defamation 
  Human resources outsourcing involves facilitation of the employer/customer and management of its human resources. This includes assistance by the HR service provider in avoiding or limiting the risks of litigation by employees who are terminated for matters arising out of breach of contract and other policy issues that could embroil the employer in statutory liability. This article addresses issues relating to wrongful termination of employment under New York law and defamation.  The complexities and nuances to be addressed when contracting for outsourced services are often quite dramatically compounded when the service provider is located in and provides the majority of its services from a country outside of the U.S.  This articles explores these complexities and nuances in greater detail.
  
  

• White Paper - Legal Considerations in International Outsourcing: Contracting for Services with Off-shore or Near-Shore Vendors  
  The complexities and nuances to be addressed when contracting for outsourced services are often quite dramatically compounded when the service provider is located in and provides the majority of its services from a country outside of the U.S.  This articles explores these complexities and nuances in greater detail.

• White Paper - Proposed Consumer Privacy Protection Act of 2003 and Personally Identifiable Information
  The European Union has a Data Protection Directive that imposes certain obligations on those who collect, store, manipulate, maintain, update, forward and disclose personally identifiable information ("PII") of consumers.  Existing U.S. federal legislation assuring privacy of such information is broad and extensive, but not generally applicable to all persons whose "PII" might be gathered and used.  Congress is considering adoption of a federal Consumer Privacy Protection Act of 2003, H.R. 1636 (108th Cong., 2nd Sess.).  Find out how this bill would take steps to ensure that persons collecting such PII ("data collection of organizations") would notify the consumer when the PII is used for a purpose other than that which it was originally collected. 

• Audit Rights in Outsourcing:
  Outsourcing customers expect that the service provider's invoices will be accurate.  To safeguard against potential errors, the customer may require the service provider to explain the invoice before services are rendered and after the invoice has been billed.  What rights does the customer have if the customer pays the invoice and later discovers a million dollar error?

• Securities Fraud in Contingent Outsourcing:
  Specialized outsourcing service providers manage the collection process for consumer receivables such as credit card debt, consumer installment purchases of goods from retail stores, home mortgages and other payment obligations.  Securities underwriters package such receivables into collateralized mortgage obligations ("CMO's"), collateralized credit card securities, "securitized" receivables and similarly labeled special-purpose asset-backed securities.  The underwriters then sell the pooled payment streams to investors, typically "qualified institutional investors."  In the sales process, the underwriter makes certain representations concerning the effectiveness and predictability of the collection process. Under certain conditions, investors relying on such representations may have a securities fraud claim if the transactions processing company fails to perform, such as in bankruptcy.    

• Spin-off Management 101
  The termination of a long-term outsourcing contract in midstream, before the normal expiration, requires careful legal and business planning.  It may also require payment of a large termination fee.  In this case study, we analyze such a case involving the termination of Equifax spin-off Certegy's contract with EDS and the transitioning to IBM as a new services provider. 
  
  

• "On Demand" Computing in Europe: The AXA - IBM Deal
  This case study analyzes the "on-demand" computing model in the European context.   The case involves the $1 billion Axa S.A. transaction announced at the end of February 2003.  
  
  

• Xenophobia In Outsourcing
  In the United States, layoffs during the downward economic cycle following the dot.com bubble and then the 9/11 attack have had a severe impact on the local economies.  In the resulting legislative debate over the impact of outsourcing, some state legislators have proposed a reversion to the "Buy American" principle that conflicts with international trade.
  
  

• Antitrust In Outsourcing
  Outsourcers have an urge to grow.  The methods of growth can include contracts that restrict competition or acquisitions and mergers that reduce competition.  This report addresses the principle rules of antitrust in the United States.  Antitrust laws (in the United States) and "competition laws" in the European Union and elsewhere are intended to protect consumers from unfair competition.  
  
  

• Joint Ventures in Outsourcing 
  On December 12, 2002, Hewlett Packard and NEC announced a joint venture ("JV" or "alliance" for our discussion) with NEC to engage in outsourcing business in Asia, the United States and Europe.   The legal structure of the joint venture was not fully disclosed, but some guesses may be made.  This article discusses these guesses.
  

• Gain Sharing Under the E-Government Act of 2002 
  The E-Government Act of 2002 authorizes federal agencies to enter gain-sharing contracts for information technology.  The new law allows the government "to share with contractor in savings achieved through contract performance."  Read more about these "share-in-savings" contracts.
  
  

• U.S. Homeland Security Act of 2002 
  The Homeland Security Act of 2002 has potentially significant implications and private and governmental purchasers of technologies should become familiar with the impact of the Act.
  
  

• Services Aggregator Model 
  In May 2002, SAIC, based in San Diego, California, offered a "new model" for outsourcing: the Services Aggregator Model.  This article highlights this paradigm.
  
  

• Transborder Outsourcing of Business Processes for Banks
  By definition, outsourcing involves the transfer of responsibility for providing a business function from a customer to an external services provider. Cross-border outsourcing in regulated industries presents some unique issues in law and business.
    

• Truth in Outsourcing
  For our discussion, there is no “truth in outsourcing” law. There are many laws, and unwritten “common laws,” relating to fraud, misrepresentation, consumer warranties, implied warranties and the like.
   

• Outsourcing: Evolution From Single Supplier to Best of Breed.
  This article focuses on the evolution of outsourcing in the last ten years and how new models have developed.
   

• A Unique Tool for Family Owned and Privately Held Businesses. 
  Outsourcing is the process of transferring to an external services provider.
   

• International Outsourcing: The Legal View of What’s Different
  This article highlights legal aspects of "what’s different" in international outsourcing.
    

• Flexibility in Service Contract
  How to Build it and Keep it.
     

• Global Trends & Outsourcing
  Performance-based strategic sourcing, alliances and partnering pose new opportunities for competitive advantage in a global economy. advantage in a global economy.

• When not to Outsource
  

• PEO Whitepaper
  

• Merck Pricing Case